Methanex Loses, U.S. Wins

It started with leaking underground storage tanks and ended up as a complex international trade case. The players include a Canadian chemical producer, the State of California, and the gasoline additive methyl tert-butyl ether (MTBE). The situation involves tainted drinking water, arcane provisions of the North American Free Trade Agreement (NAFTA), and allegations of political corruption.

While this dispute is complicated, its outcome will figure into discussions on whether existing or pending international trade agreements threaten countries' environmental, health, and safety standards.

Bringing the case under NAFTA was Methanex, a Vancouver-based company that produces methanol, a chemical used to manufacture MTBE. The substance is added to gasoline to boost the oxygen content of the fuel.

Methanex challenged California's ban of MTBE in gasoline. The company cited provisions of the trilateral trade deal that are designed to protect investors from Canada, Mexico, or the U.S. from having their assets seized or diminished by government action in another NAFTA country. Such a takeover is often termed a government "taking" in the U.S. and is dubbed "expropriation" in international trade parlance.

After more than five years of litigation, a NAFTA tribunal last month rejected Methanex' claim that California's ban of MTBE hurt the company's investments because it affected market demand for methanol (C&EN, Aug. 15, page 23).

Methanex is not the first chemical manufacturer to sue under the section of NAFTA that protects foreign private investment from expropriation. Richmond-based Ethyl Corp. challenged Canada's 1996 ban on import and interprovincial trade of the gasoline additive methylcyclopentadienyl manganese tricarbonyl. Canada settled the case for $13 million and lifted the ban.

Environmental groups, which are worried that investor protection provisions in trade deals can be used by foreign businesses to attack domestic environmental laws and regulations, have tracked the Methanex case for years. So have business groups that favor liberalizing trade, fearing that the case could become a stumbling block for acceptance of future trade deals.

The genesis of the Methanex case predates NAFTA, which was launched in 1994.

For the past 15 years, until Congress passed major energy legislation this summer, cleaner burning reformulated gasoline sold in polluted urban areas had to contain 2% oxygen by weight. This "oxygenate mandate" was part of the 1990 amendments to the Clean Air Act. It was intended to create a bigger market for corn-based ethanol. But many refiners instead opted for MTBE as their oxygenate for reformulated gasoline, in large part because the chemical can be added at the refinery. In contrast, ethanol, which is hygroscopic and can pick up trace water in storage tanks and pipelines, is blended into gasoline when tanker trucks are loaded for fuel delivery to service stations.

A NAFTA tribunal rejected Methanex' claim that California's ban of MTBE hurt the company's investments.

MTBE TURNED OUT to be an environmental headache. When gasoline containing this additive gets into soil, often through leaking underground storage tanks, MTBE makes its way into groundwater.

At low concentrations, the stinky chemical renders drinking water unpalatable. Questions remain about its toxicity. Arid California, where water is a coveted commodity, felt a particularly hard pinch when utilities had to shut down wells because of MTBE contamination (C&EN, May 8, 2000, page 40).

California announced in 1999 that it would phase out MTBE in gasoline. A full ban took effect in early 2004.

Also in 1999, the state asked the U.S. Environmental Protection Agency to waive the oxygenate mandate in California, arguing that refiners can now make cleaner burning gasoline without oxygen-boosting additives. EPA rejected the state's request in 2001, and California sued the federal agency. That case is pending in federal court, though it may be moot because the new energy law eliminates the oxygenate mandate.

Meanwhile, Methanex lodged its complaint under NAFTA.

California officials are enthusiastic about the outcome of the case. Attorney General Bill Lockyer says, "This sends a message to all foreign investors who would challenge the environmental and labor laws that are the fabric of our democracy."

A U.S. State Department official, who spoke to C&EN under the condition that she not be named, says, "Our trade agreements and investment treaties do not encroach on states' rights to regulate in the public interest."

The State Department has repeatedly defended state regulations against foreign countries' claims that the rules violated international investment or trade accords, she says, although the Methanex case is probably the most publicized.

The State Department official called the Methanex tribunal's opinion "a well-reasoned decision." She adds, "We're hopeful it'll discourage similar, baseless claims" against U.S. regulations by foreign companies.

THE CASE'S outcome "lays to rest a lot of concerns" that trade agreements threaten environmental protections, says Sushan Demirjian, manager of international trade for the American Chemistry Council. Demirjian cautions that this view is her own and does not represent the perspectives of ACC member companies, which include Methanex. The chemical industry group did not take a position in the Methanex case.

The tribunal's opinion "counteracts fear-mongering some groups are doing" to stall liberalization of trade, which ACC promotes, Demirjian adds.

Methanex is not saying much about the Aug. 3 ruling against it.

"We continue to believe that the State of California acted arbitrarily to ban MTBE in gasoline without any defensible scientific basis," the company said in an Aug. 16 statement. "MTBE was a symptom of gasoline release to the environment, and banning MTBE did nothing to stop those releases."

Attorneys for environmental groups have studied the Methanex opinion extensively and say the decision contains a number of important findings that could affect future investor protection cases against environmental, health, and safety laws. Industry attorneys familiar with the case say they are still reading the tribunal's exhaustive 307-page decision.

"I'm fairly reassured by this [decision]," says Scott Miller, chairman of the U.S Council for International Business's investment committee. Miller, who is Proctor & Gamble's director of national government relations in Washington, says the ruling in the Methanex case demonstrates that international investment tribunals are responsible, smart, and thorough.

Martin Wagner, managing attorney for international programs for Oakland, Calif.-based Earthjustice, and Howard Mann, a private attorney in Ottawa who is the senior international law adviser to the Winnipeg-based International Institute for Sustainable Development, say the opinion is based on rational legal reasoning. Both Wagner and Mann filed friend-of-the-court briefs on behalf of environmental groups in the Methanex case. This itself was precedent setting--never before has any trade tribunal accepted arguments from parties besides the company bringing an investment case and the government defending itself.

Wagner says he's not sure that the decision against Methanex will make a significant difference in whether foreign companies challenge state environmental laws under NAFTA in the future. The Methanex case was "such an extreme claim" that "it may not be a helpful precedent for future cases," he says. In addition, international trade tribunals are freshly constituted with each case--there is no worldwide or North American court for such cases--and arbiters are not bound by previous decisions, Wagner says.

Mann says that, although the decision imposes no binding precedent, other international trade tribunals "will have to take note of this." He believes that developing countries in particular will grasp the importance of this decision for the defense of their regulations and laws against attacks by foreign investors.

Mann says the Methanex tribunal clearly stated that a regulation that does not discriminate against foreign companies and is designed to protect the public welfare does not constitute a direct taking of property. Therefore, this type of regulation is not considered expropriation, and foreign investors affected are not eligible for compensation, he says.

THIS IS THE first time an international arbitration panel has made such a determination, Mann says.

The NAFTA tribunal added a caveat to this broad pronouncement, Mann adds. This caveat would apply if government officials promise foreign investors that they will not change an existing standard--or enact a new standard if none exists. If the government breaks its word, then a company could seek financial recompense.

Mann suggests that, in time, this caveat may get whittled back. For instance, a government may agree not to regulate a certain product, perhaps a new commercial chemical, based on data supplied by the foreign investor. But in time, new information may emerge that the product poses an unacceptable risk unforeseen by the manufacturer. A government should not be forced to ignore new data, Mann argues.

Another part of the Methanex decision involves a subtle legal distinction that may have important ramifications for future cases under NAFTA and other treaties, Wagner says. Investors that have real property--such as land or factories--expropriated by governments can seek compensation for loss of both the property and for market share and "goodwill." But the Methanex tribunal determined that market share and goodwill alone are not considered "property" taken by government regulations or laws.

If market share and goodwill alone were considered property, foreign companies could seek compensation for all sorts of regulations and laws, Wagner says. Such a finding would have made federal and state governments wary about instituting any type of standards, he adds.

Part of the Methanex case involved allegations of political corruption.

In its arguments, Methanex claimed that California's MTBE ban was politically motivated and designed to benefit the U.S. ethanol industry, in general, and the company Archer Daniels Midland, specifically. ADM, the largest U.S. producer of ethanol, contributed to the campaign of former California Gov. Gray Davis (D), who implemented the MTBE ban.

The NAFTA tribunal determined that the ban was based on a scientific study requested by the California Legislature before Davis was elected governor.

The Methanex tribunal also found that ADM's donations to Davis' gubernatorial campaign were legal and that Davis also received "sizable contributions" from MTBE users. It rejected Methanex' suggestion that Davis or the California government intended to favor U.S. ethanol makers--or specific companies such as ADM--or to harm U.S. or foreign methanol producers.

Mann credits the tribunal for looking in depth at Methanex' allegations of corruption. This, he says, may turn out to be a "hidden gem" in the decision for lawyers defending regulations against future investor claims.

"There's no legal reason why the same reasoning can't be applied to investors" in international trade disputes, Mann says. This could ultimately be used against a foreign company that bribes government officials to set policy more to its liking, he says.

Companies have a legitimate expectation that their investments will be protected in nations that are party to investor-protection agreements such as NAFTA, Mann explains. Those accords essentially serve as legal contracts. But if the contract is corrupted by a business's actions, such as bribery, the foreign company may lose its ability to get compensation for government expropriation of its property, he posits.

Some observers were surprised that the tribunal ordered Methanex to reimburse the U.S. government $4 million in litigation costs. "I've got a feeling the tribunal thought a lot of people's time and money were wasted," Wagner says.

Methanex, which relied on private attorneys, spent between $11 million and $12 million to press the case, according to attorneys involved.

Miller, of P&G, says companies now have a fairly clear idea that investment suits under NAFTA will take a long time and cost millions to pursue. This knowledge may help weed out "dumb cases," he says, adding that investment cases against a government are "almost always the last resort" for companies challenging laws and rules that they believe unfairly target them.